Opportunities in a bear market
Bear markets are dreadful - wealth accumulated over years can be lost in a few months. However, many good opportunities also exist.
In order to make the most of the opportunities that exist in a bear market, awareness of where the market is on the boom-and-bust cycle is helpful. The previous two bear markets demonstrate the ideas discussed below.
Calm before the storm
If a bear is about to emerge, you can take some profits by switching into a money market vehicle. This ensures that wealth is protected and leaves one in a favourable position to seize investment opportunities that arise when the dust settles.
How can you tell when a bear is approaching? By keeping your ear to the ground! A few knowledgeable investment houses pointed out, as far back as 2006 and 2007, that the market was steadily approaching unsustainably high levels. Additionally, one can assess the frequency and duration of previous bull-and-bear cycles in the local market, as well as the prevailing level of dividend yields and price earnings ratios in comparison to their long-term average.
But there is no precise science to determine the top or bottom of any market.
Going defensive
As losses begin to accumulate at the outset of a bear market, which historically precedes a real correction, risk-averse clients, with the assistance of their financial advisers, may want to re-balance their portfolios, particularly if during the preceding bull-run equity exposure increased beyond prudent levels creating a mismatch between the existing asset mix and the client's long-term strategic asset allocation.
Also, changing from once-off contributions to regular contributions ensures that the investors get the benefit of rand cost averaging - purchasing more units as asset prices fall in order to benefit from a larger holding of units with eventual recovery.
Fear, panic and uncertainty
When market participants begin to panic as the "doom and gloom" mindset takes over, stocks are often heavily discounted, compounded by forced sales as portfolio managers liquidate positions to meet disinvestments. At this stage, investors with a long-term investment horizon may want to consider regular investments in carefully selected equity funds.
Investors with a long-term horizon still need growth assets to help achieve their objectives and to beat inflation. History tells us that recovery can be swift – after the 1998 and 2002 and 2003 declines, the market rose by 19.5% in two months and 14% in one month, respectively. Long-term clients seeking refuge in "safe haven" assets such as cash may miss out on these initial surges.
Don't want to bother rebalancing?
Maintaining a balanced portfolio can offer some protection against a bear market, by ensuring you are not at the mercy of any particular asset class. Although your portfolio is unlikely to outperform each asset class over any particular period, it is also unlikely to trail all asset classes. However, it is not possible to construct a 100% bear-proof investment portfolio.
The other alternative is to invest in an asset allocation portfolio where the professional fund manager can, within guidelines, make rebalancing decisions for you.
